Friday, April 1, 2011

The Psychology Of Silver

The silver chart today has many investors on edge because of the parabolic spike seen since August 2010 when Bernanke hinted that QE 2 was coming.

The silver metal is now up 10 fold since its bull market began back in 2000.  The chart below shows the 11 year silver run and recent spike: did an excellent job this morning comparing silver's current bull market run to that of the NASDAQ from its lows during the 1970's to its first spike move higher in 1991.

The chart below shows this move:

It is important to remember the psychology around the NASDAQ back in 1991.  A new phenomenon called the "Internet" was just entering the economy and ushering in a whole new sector of companies, and the NASDAQ was the breeding ground for these new pioneers.

The American public was not even paying attention to technology stocks at this point.  Yet looking at the chart above you could easily label it as a blow off top, or the peak of a bubble.

Of course we now know what happened after 1991.  The bull market was only beginning.  The chart below shows both the original 11 fold increase in the NASDAQ, which looks like a tiny speed bump on an enormous mountain, and the real blow off top which came 8 years later in 1999.

This was the moment when the public entered the market.  They came rushing in together, as a herd, and doubled the NASDAQ in just over a year from its already high price.

This was a true bubble.  People felt that stocks could not fall, that we were in a "new" economy. and other worthless dot.coms with no earnings launched IPO's and the stocks traded with higher valuations than GE and Walmart.

Today the silver chart is identical to the NASDAQ's of 1991 and just like then the public is not even paying attention to it.  Will silver's chart repeat the NASDAQ's?  I think it will do better.  I believe this will be the greatest mania in history, bigger than both dot.coms and real estate.

When this market reaches the final stage, the euphoria stage, everyone will be talking about it.  The American public will rush in, as a herd, because they will feel that silver cannot fall.  It will be the new safe investment.

And it will be time to sell.

Thursday, March 31, 2011

Leading With True Courage

You've probably read in the news that democrats and republicans are battling with vicious fury over cuts in the budget between $30 and $60 billion.

Judging from the intensity of the media coverage and the passion our leaders use when speaking about these cuts, my initial reaction was to stand up and applaud their bravery to take on the tough budget issues.

Then I checked the percentage of the total budget they were hoping to remove with this heroic American act:

1.875 %

Yes, that is one percent.  No mistake on the typing.

Our government spends $4 trillion per year, currently owes over $75 trillion when factoring in unfunded liabilities, and they cannot agree on how to remove $30 billion.

Bill Gross, who manages the largest bond fund in the world over $1.2 trillion in size, decided to reduce his position in US government debt last month.  His total holdings today?

Zero.  Nothing.  He dumped it all.

75% of our annual spending is composed of social security, medicare, medicaid, defense spending, and interest on the debt.  These costs are considered untouchable.

If you eliminated every non-defense discretionary (everything else) we would still run a $700 billion annual deficit.

Does it make sense now why $30 billion means nothing?

From Bill Gross this month in his monthly newsletter, explaining exactly what he sees coming:

If I were sitting before Congress – at a safe olfactory distance – and giving testimony on our current debt crisis, I would pithily say something like this:

“I sit before you as a representative of a $1.2 trillion money manager, historically bond oriented, that has been selling Treasuries because they have little value within the context of a $75 trillion total debt burden.

Unless entitlements are substantially reformed, I am confident that this country will default on its debt; not in conventional ways, but by picking the pocket of savers via a combination of less observable, yet historically verifiable policies – inflation, currency devaluation and low to negative real interest rates.

Gold continued its rocked lauch higher today toward new all time record highs.

Wednesday, March 30, 2011

Shadow Inventory - Artificial Stimulus

CoreLogic reported this morning that there are currently 1.8 million homes that are 90+ days delinquent, in foreclosure or bank owned that are being held off the market.  This is also known as the "shadow inventory."

In addition, there are 2 million current (on their payment) loans that are more than 50 percent upside down.  (The mortgage on your home is $400,000, and the home is worth $200,000)

They anticipate that almost all these homes will end up in the shadown inventory, as once logic sets in, these homeowners will stop making their monthly payments.

LPS Mortgage Monitor reported earlier this week that the average number of days a home is delinquent before the bank takes possession is now up to 537 days.

That means the 2 million homeowners above, once they stop making payments, will live for free for an average of 1.5 years.

This artificial stimulus, along with the 99 weeks of unemployment benefits, is what keeps the IPads flying off the shelves.

The ultimate end game, when the shadow inventory finally enters the market, will be a further collapse in home prices, another round of massive losses on the big bank balance sheets (now the federal government), another round of massive losses on Fannie and Freddie (now the federal government), and a massive increase on our federal deficit to pay for it all.

The federal government is currently bankrupt and the federal deficit is paid for by the Federal Reserve's printing press.

The ponzi scheme ends with a collapse of the currency and the purchasing power being transfered to those holding precious metals, foreign currencies, and other commodities.

How long will it take?  Not sure.  Bernie Madoff was able to run his ponzi scheme for many years.  Then one day his investors woke up broke.

Tuesday, March 29, 2011

Case Shiller Home Pricing: March Report

The Case Shiller Home Price Index was released this morning for the month of January. (An average of November, December, and January)

Home prices have now fallen for 7 straight months and are now down 31.3% from the peak of the bubble.

We received better news yesterday from the LPS mortgage monitor which showed non-current and deliquent loans finally beginning to slow down.

As these homes turn into foreclosures and are flushed onto the market it will bring us one step closer to home prices reaching their bottom.

The final step will be for the government to step away as the artificial mortgage market. 

When both of these events occur we will experience the last major plunge downward in home prices.  This will be the greatest buying opportunity in our lifetimes.

We are currently in inning 6 of the home price declines.  When we reach inning 1 of the next market cycle is up to our government which now purchases or guarantees 97% of all mortgage loans created.

Monday, March 28, 2011

The Broken Window Fallacy

Incredibly well done video below that provides a visual to Henry Hazlitt's opening chapter to his must read book: "Economics In One Easy Lesson."

If you have children that are about to enter college and take an economics course, please have then read Hazlitt's easy to understand book before learning anything they try to teach at schools.

Because our leaders are taught the wrong form of economics in school, it is the equivalent of a doctor learning to prescribe the incorrect prescription to a patient, and as the economy/patient continues to get more and more unhealthy, they continue to up the incorrect dosage making the original problem worse.

Investors that understand real economics have the ability to see the effects of the disease before they arrive.  This was how many economists were able to predict the crisis of 2008 well before the Lehman bankruptcy.

It is also why they can now see there is a far bigger crisis on the way due to the wrong medication for the economy currently being prescribed.

When someone tells you that the Japanese earthquake or hurricane Katrina is a positive stimulant to the economy because it creates new jobs to help clean the disaster, please send them the link to the video below: